The legend of a lady in a lake and a centuries-old tradition of herbal medicine are being used to restore the fame and fortunes of a remote Welsh village that was facing "terminal decline".

Backed by national lottery cash, the residents of Myddfai (parish population 400) are launching a range of herbal remedies and other branded goods, which they hope will revive a place renowned across Europe in medieval times for its potions, oils and unguents derived from plants.

The villagers plan to create a mecca for herbal remedies. Their scheme is bound to win the approval of one famous neighbour, Prince Charles, who has a holiday home nearby.

Jo Gideon, one of the leaders of the project, said the scheme could be a "lifeline" for the village, in Carmarthenshire, south-west Wales.

Gideon said the village was failing to benefit from its own heritage, and needed a "kickstart". She warned: "The absence of any amenities has meant it is in danger of terminal decline as younger generations are forced to leave to find employment." Traditions and knowledge that had been passed down risked being lost, she said.

Not so long ago, Myddfai was a bustling place with three pubs, two shops, a post office, a smithy and a slaughterhouse. There was a sense of community and a pride in its past, both historical and legendary.

At the heart of the village, and of the effort to revive its fortunes, is the tale of a lady who rose from a lake to marry a local man, with whom she had three sons. She eventually retreated to the lake but passed on her knowledge of the medicinal properties of plants and herbs to the eldest son. The son and his descendants did exist, even if the lady in the lake did not. They became the real-life physicians of Myddfai, who were renowned across Europe for their expertise.

Some of the recipes sound as though they could work: feverfew for bruising, rosemary mixed with honey to prevent nausea, thyme for colds. Others seem more far-fetched: hart's tongue apparently promotes chastity; wild clary prevents envy.

The fortunes of Myddfai have taken a turn for the worse over the last few years, with many people moving out in search of work. Many of the houses have become holiday homes, and businesses that use the name of Myddfai, playing on its historic fame, often have no link to the village and bring no tangible benefits to it.

Lewis Jones, a hill farmer who went to the village school and remembers Myddfai as a busy hub, said he wanted it "put on the map again". He said: "It has been known for centuries for its physicians. We want life here again."

Helped by more than £400,000 from the Big Lottery Fund's Village SOS scheme, the aim is to build a new hall and cafe, and to refurbish an old building next to the hall. In this complex, branded Myddfai goods will be on sale. The construction work is about to begin.

In a development that would doubtless have the physicians of Myddfai turning in their graves, European law makes it difficult to sell herbal "medicines". So to circumvent this obstacle, the producers will instead market herbal "remedies" alongside various cosmetic products such as soaps, face creams and shampoos. Other craftspeople, among them potters and quilters, will also be invited to sell their wares from the centre.

There will, naturally, be a herb garden, which the community will be in charge of looking after.

Hugh Davies, the project leader, said he hoped the herbal products would revive the village's fortunes, just as Hay-on-Wye has prospered because of its concentration of bookshops. He said: "In terms of amenity, this is a deprived place. But in the story of the physicians of Myddfai, we have a bit of magic we can hang a project on."

Excerpts of some of the physicians of Myddfai's remedies

Comfrey The herb is used for all wounds, burns etc ... Externally it is specific for chronic varicose ulcers. For gastric use it is often mixed with marshmallow and meadowsweet.

Cowslip For the bite of a mad dog. Seek some cowslips, pound them, mix with milk and administer to the patient as his only drink for nine days, being first strained through a fine cloth.

Dandelion For jaundice. Take dandelion, corn blue bottle and garden parsley. Pound them well, with a good strong ale, and keep it carefully in a narrow mouthed water bottle.

Fennel The fennel is warm and dry in the second degree and is useful for diseases of the eye. It is good for every kind of poison in a man's body.

Garlic For noise in the head, preventing hearing. Take a clove of garlic ... dip it in honey and insert in the ear, covering it with some black wool. Let the patient sleep on the other side every night leaving the clove in the ear for seven or eight nights unchanged.